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The Freakonomics franchise certainly has legs. According to legions of admirers, in their best-selling series that includes Freakonomics, SuperFreakonomics, and now Think Like a Freak, University of Chicago economics professor Steven Levitt and journalist Stephen Dubner have taught us to use economic reasoning to shed light on real-life situations. In the process, they have also shown that economics can be fun.

But the fun quotient is ultimately diminished by the fact that their stock in trade is naive economics. Typically, Levitt and Dubner fail to understand that when a problem arises in a market, it generally provides an incentive for those involved to remedy the problem.

Think Like a Freak: The Authors of Freakonomics Offer to Retrain Your Brain

Take the sour-lemon story. "A new car that was bought for $20,000," they assured us in Freakonomics, "cannot be resold for more than perhaps $15,000. Why? Because the only person who might logically want to resell a brand-new car is someone who found the car to be a lemon. So if the car isn't a lemon, a potential buyer assumes that it is."

Stories like these have clearly appealed to those who enjoy clever portrayals of a dysfunctional world. But a little research would have revealed that, contrary to Levitt and Dubner, used cars with only a few thousand miles on them sell for almost the same price as when new. One obvious reason: Since car manufacturers allow warranties to be transferred to new owners, potential buyers know that even if they do buy a lemon, they will not be stuck with it.

In Think Like a Freak, the authors promise to teach us what "it takes [to be] a truly original thinker." But rather than promoting original or critical thought, their book tries to convince us of one main thing: People are stupid. We are thus confronted with half-baked theories similar to those in their previous books.

Take the example that Think Like a Freak starts out with: soccer players in the World Cup doing what is best for their own reputations rather than what is best for their team. We are told that, when a player kicks penalty shots, aiming toward the center has a better chance of success, but that fear of shame prevents players from doing so. The potential shame of kicking the ball right into the hands of a goalie standing in the middle of the goal, especially during the World Cup, keeps players from doing what is best for the team.

The data cited to support this view are a bit rough. We are informed that "only 17% of kicks are aimed" at the center of the goal, even though "75% of penalty kicks at the elite level are successful." But the real problem is that, per their usual habit, the authors assume no one else involved is smart enough to detect this cheating. If, by kicking the ball to the side, players really are failing to score, it defies belief that team owners and coaches would be blind to this abuse and allow it to continue.

Since the team's gain from winning is far greater than any shame the player risks, incentives can be used to make sure that players do what is best for the team. Stiff financial penalties can be imposed, including the penalty of being fired from the team. Then there are other kinds of possible shame, meted out to these players in front of other team members, for not serving the interests of the team.

In the ivory-tower world of Levitt and Dubner, however, owners and coaches are completely ignored, since including them would only ruin a clever insight. I contacted actual soccer coaches at three different colleges, and found that they did not agree with the authors' premise that the center shot in a penalty kick is the best strategy. Not surprisingly, then, players seem to obey their coaches' dictates on penalty kicks. (Disclosure: the author of this review sued Levitt and HarperCollins for defamation over Freakonomics in 2006.")

Levitt and Dubner also brag in Think Like a Freak about the authors' "truly original" thesis, presented in Freakonomics, that liberalizing abortion lowered crime rates. Abortion, they argued, lowered the number of unwanted children who would be prone to commit crimes. But again, the authors naively ignored the new set of incentives that legalized abortion offered.

What actually happened when abortion was legalized will sound ironic, but no more so than the unintended consequences of many other changes in laws and regulations. Multiple studies have shown that the availability of legalized abortion increased the incidence of unprotected sex, which led to more unwanted pregnancies, which in turn boosted the number of unplanned births, even offsetting the reduction in unplanned births due to abortion. The net result: an increase in the number of single-parent families who couldn't devote a lot of time to raising their children, an effect Levitt and Dubner ignored and one that more than offset what they focused on.

It would be nice to believe that Think Like a Freak and its prequels have promoted interest in sound economics. But alas, when you think like a freak, you think superficially, like most freaks probably do in real life.

JOHN R. LOTT JR. is the author of Freedomnomics: Why the Free Market Works and the Other Half-Baked Theories Don't.

Investing Secrets

The master of money flows

Reviewed by Victor Niederhoffer

In this timeless and thought-provoking tome, market trader and analyst Laszlo Birinyi reveals some of his greatest successes and most celebrated techniques.

Perhaps best known to Barron's readers for having called the bottom of the market just before it did bottom out ("For a New Year, Signs of a Bottom," Jan. 5, 2009), the founder and president of Birinyi Associates has developed a raft of practical, tested, money-making ideas for trading individual stocks and for market averages that are widely used by investors. Among his fellow professionals, he is probably most renowned for inventing the concept of "money flows." Happily, this treasure-trove of all the master's main ideas includes a chapter titled, "Money Flows: The Ultimate Indicator."

The Master Trader

As he explains, money flows are a measure of net buying or net selling in a stock, sector, or market index over a given period of time. Money flows might be called the ultimate indicator because the measure can be used as an advance indicator of the price trend. Birinyi declares in his typically blunt style, "If money and price are coincidental, they provide no added insight."

The 20 chapters in The Master Trader are probably best read and absorbed over a long period. If there is one overriding lesson that The Master Trader can teach us, it can be found in the chapter "You Must Remember This." The lesson is, "It's smart to be bearish, but not necessarily profitable." It's smart because it's disconcerting to read the morning papers on global strife, political corruption, and man's inhumanity to man and nature, and still have an optimistic outlook. It's smart because, when you get out of the market to avoid catastrophe, you reduce your chances of suffering a huge decline.

But you also reduce your chance of riding the long-term gains the stock market offers. As Jim Lorie, founder of the Center for Research in Security Prices at the University of Chicago, liked to say, "When you get out, you never know when to get back in." As studies cited by Birinyi point out, stocks that plunge generally rebound over subsequent months.

In a striking statistical appendix called Cost of Timing the Market, Birinyi demonstrates that long-term performance is surprisingly dependent on whether you were in the market in the five best days it has each year. A buy-and-hold strategy from 1900 through 2012 would have yielded stupendous returns. But if your timing was such that in each year, you missed the five most profitable days, your long-term returns would have been negative. A dollar invested in 1900 would have shrunk to a penny, which highlights the perils of jumping in and out of the market in the hope of maximizing gains.

The Master Trader has many strengths, but there is one weakness. Birinyi seems insufficiently aware of the fact that there is considerable randomness in the market. Even the best market patterns are right just 60% of the time, since the cycles are ever changing. Strategies that work the best in one period frequently work the worst in the next. Many of the studies that Birinyi cites have had alluring profits in certain periods but disastrous losses in others.

Some timeless advice from the master: "Those who regularly monitor the markets and are diligent in their efforts should develop a sense of reality. They will simply recognize that in this game people do not bat .675, that few stocks double in any 12-month period, and that 5% fees provide significant hurdles."

VICTOR NIEDERHOFFER, Manchester Trading's chief speculator, is the author of The Education of a Speculator and, with Laurel Kenner, Practical Speculation.

Stifling Genomics

Regulation vs. DNA

Reviewed by Mary J. Ruwart

Our genetic code determines which medicines are likely to cure us, and which ones will do us harm. Knowing your genetic code can help you and your doctor deal with potential problems, such as diabetes, before these problems occur. Such individualized medicine is the promise of the 21st century's "cure in the code."

But as Manhattan Institute senior fellow Peter Huber points out in his exciting and authoritative review of accelerating advances in personalized medicine, 20th century regulations are impeding the vast potential for these advances to transform our lives.

The Cure in the Code: How 20th Century Law Is Undermining 21st Century Medicine

Most abnormalities, like high blood pressure, can have multiple genetic causes. For this reason, a drug that works for one person won't work for another and may even cause unacceptable side effects. Genetic testing can help doctors choose the drug that will be most beneficial for each patient without resorting to trial and error.

Happily, over the past decade, the cost of such genetic analysis has dropped about 50,000-fold. Huber makes frequent reference to 23andMe, a company that offered individuals, for a mere $99, a genetic analysis that included health reports on their susceptibility to over 250 diseases and conditions.

Yet, late last year, the Food and Drug Administration stopped 23andMe from selling its health-based genetic analysis on the grounds that these tests constituted a "medical device" that needed FDA approval. Medical devices must be approved by the agency just like drugs must be approved, and the process for devices can be even more onerous than for drugs.

Last month, 23andMe responded by submitting an application to the FDA to test for the rare disease, Bloom syndrome. If the company has to submit approval applications for each condition implicated by its genetic tests, the immense cost involved will make the full genetic panel unaffordable for most consumers.

As Huber points out, the FDA's one-size-fits-all paradigm on regulation is also impeding the development of new drugs. "Molecular biomarkers" that are the fruit of genetic testing can predict a drug's effectiveness, and its side effects, far more quickly and accurately than the conventional clinical trials that have long been the agency's gold standard.

Yet, the FDA continues to demand large studies that go on for years without adjustment. Half of the patients get a placebo and half get the drug. However, with the aid of biomarkers, progress can be made more rapidly when small numbers of patients have their treatment results compared, not to patients given placebo, but to their own pretreatment baseline, with weekly or monthly evaluation and protocol adjustments based on these results. Unfortunately, the FDA is willing to adjust its regulatory requirements only under extreme political pressure and quickly reverts to its old, outdated ways when those pressures subside.

Even before the genetic-code revolution, the FDA was impeding progress. As the author recounts, when the agency took over the licensing of vaccines in 1972, it made existing manufacturers do more extensive and costly human trials. In 2001, when anthrax was mailed to networks, newspapers, and U.S. senators, the anthrax vaccine was still not FDA-approved. After three decades, it was tied up in regulatory red tape, probably because the manufacturer didn't see enough demand to justify spending the extra millions to satisfy the agency's requirements.

The crisis provoked action. Terrified of being left unprotected against mail-borne anthrax, Congress quickly passed a law allowing the FDA to approve bioterror antidotes in a matter of days, as long as benefits "appeared" to outweigh the risks. If this standard were applied to 21st century medicine, we all might quickly benefit from the cure in the code.

MARY J. RUWART, a former pharmaceutical- and academic-research scientist, is the author of Healing Our World in an Age of Aggression.

Numbed by News

Why it pays to unplug

Reviewed by Joe Queenan

Alain de Botton writes books that are like no one else's. Try his 1997 best seller, How Proust Can Change Your Life. Then watch your life change.

Or try his startlingly original new book, which sets out to explain why the media consistently fail to deliver news in a useful fashion. "News stories tend to frame issues in such a way as to reduce our will or even capacity to imagine them in profoundly other ways," de Botton writes. "Through its intimidating power, news numbs. Without anyone particularly rooting for this outcome, more tentative but potentially important private thoughts get crushed."

The News: A User's Manual

De Botton does not believe that the media are inept, lazy, or corrupt; he simply feels that most journalists go about their business the wrong way. Many journalists, he argues, view themselves as "a branch of the police force," which is why they write dull, interminable articles that few people are going to read. Conversely, entertainment journalists, salivating over fabulously successful outliers like Mark Zuckerberg and Lady Gaga, probably think that they are lifting the public's spirits. In fact, he says, celebrity journalism makes ordinary people feel envious, even worthless.

"The news should help with our feelings," he writes. "It shouldn't pretend that it is normal to present an audience with repeated evidence of the accomplishments of the most energetic and inventive members of the species and not expect that people will be driven a little crazy as a result." He imagines John Q. Public exclaiming, "I can't stand being me anymore!"

News about the Third World is almost always bad: "We don't know whether anyone has ever had a normal day in the Democratic Republic of Congo, for no such thing has ever been recorded by a Western news organization."

De Botton would like journalists to craft their news stories as narratives rather than as a series of cold hard facts. And, like many others, he would like journalists to be less cynical because "national decline can be precipitated not only or principally by sentimental optimism, but also by a version of media-induced clinical depression."

Ultimately, he encourages mere mortals to periodically unplug and seek "relief from the news-fueled impression that we are living in an age of unparalleled importance, with our wars, our debts, our riots, our missing children, our after-premiere parties, our IPOs, and our rogue missiles." Good luck with that.

JOE QUEENAN's book about reading, One for the Books, was recently issued in paperback.